Lenders tighten mortgage rules

Lenders across the country, stuck with piles of loans investors wouldn't buy, are jacking up rates and imposing stricter requirements on even the most creditworthy borrowers. And once again, to close a deal, home shoppers often have to put down their own money, prove what they say they earn, as well as show a track record for payment.

The credit tightening, while viewed by some as a return to sanity after years of lending excesses, nonetheless threatens to squeeze out even more cash-strapped borrowers, extending the housing downturn and distressing the rest of a debt-laden economy.

"Every single day, there are lenders putting a freeze on something," says Dana Bain, president of Premiere Mortgage Services Inc., a Sterling, Mass., brokerage focusing on "prime" borrowers.

"You're talking about a huge segment of the market being taken out" because of the more stringent lending guidelines, he adds.

The shift started in mid-2006, when rising defaults on mortgages to people with patchy credit history led lenders to raise standards for approving loans to so-called subprime borrowers.

But the forced tightening proved too late both for Wall Street, which already had been saddled with defect loans ineligible to be funneled into securities for sale, and for small lenders who relied on financing from investment banks.

With funding cut off, some 100 lenders have closed their doors since late 2006, according to the Implode-O-Meter blog on the mortgage industry. And today, the subprime squeeze has evolved into a broader credit crunch: Investors are shunning anything that reeks of mortgage, more lenders are failing, and the remaining ones are racing to pull purse strings.

Curtailment like this is bad news for Ronny Satloff Halevi, who is looking to buy a $1 million house in what she calls "an average neighborhood" in Los Angeles.

But "despite being a strong client with super credit," says her broker, Seth Asher, at OlympiaWest Mortgage Group, she couldn't get a loan that covers 100 percent or even 95 percent of the cost of the house.

"I don't have much savings to put down," says Halevi, a 45-year-old homemaker.

What's behind lenders' decision to move away from no-money-down mortgages is investors' plunging appetite for those loans due to their higher-than-average default rate.

With a piggyback mortgage, a borrower takes out two loans, with the first covering 80 percent of the home's purchase price and the second covering the rest. Such a package allows the borrower to avoid paying mortgage insurance required by lenders when the down payment is less than 20 percent of the cost of the house.

In 2005 and 2006 -- the tail end of the most recent housing boom -- about 40 percent of first-time home buyers bought with no money down.

Now the downside: When a borrower defaults on the second loan, the lender often can't recover any of the principal and interest due from a sale of the home, because the proceeds from the sale often are not enough to pay back the provider of the first mortgage.

Banks including Wells Fargo & Co. and Wachovia Corp. are curbing so-called Alt-A mortgages, which are made to creditworthy borrowers who don't want to document their claimed income or assets.

IndyMac Bancorp Inc., one of the biggest Alt-A lenders in the country, recently told staff it has to make "major changes" in its underwriting practice as the market for mortgage bonds has become "panicked and illiquid."